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82 HASKINS & SELLS November Financial Statement Analysis BY SPENCER B. STEVENSON (Of the New York Thirty-ninth Street Office) (EDITORIAL NOTE: Of late years the subject of analysis of financial statements has become increasingly prominent. The task of interpreting correctly a balance sheet and a statement of income requires no little skill. A number of methods to facilitate evaluation have been advanced. Among those who have made notable contributions to the subject are Mr. Alexander Wall, Mr. James H. Bliss, and Mr. Stephen Gilman. Although all aim toward the same goal, their methods of approach are divergent. Mr. Stevenson has attempted in the following article to compare and evaluate them and to set forth the results of his own research into the subject. The article has been reprinted, with adaptations, from the March, 1925, issue of Management and Administration.) BUSINESS executives, bankers, investors, and others, are constantly confronted with the problem of interpreting financial statements, in order to formulate policies or to judge the present and prospective soundness of a business. To facilitate such interpretation, several methods of analysis have been proposed. Among them are those described in the articles entitled " A Method of Balance Sheet Analysis," by Stephen Gilman, and "Balance Sheet Analysis," by Alexander Wall, and in J . H . Bliss's books, Financial and Operating Ratios in Management and Management Through Accounts. The purpose of this article is to compare the several methods proposed, from the viewpoint of practical utility in judging the condition of a business, and to contribute some independent thoughts on the development of the subject toward that end. Ratio Method In brief, by the ratio method, two elements whose relationship to each other is considered to be of importance are expressed by dividing one into the other and expressing the result decimally. Following is a comparison of the ratios advocated by the writers whose views are now under consideration: RATIO PROPOSED BY Current assets to current liabilities Gilman Wall Bliss Sales to accounts receivable Gilman Wall Bliss Sales to inventory Gilman Wall Bliss Sales to fixed assets Gilman Wall Bliss Sales to net worth Gilman Wall . . .. Net worth to fixed assets Gilman Wall . . .. Net worth to debt (total liabilities) Gilman Wall . . .. Inventory to receivables Wall . . .. Sales to total assets (total capital employed) Bliss Operating profits to total assets (total capital employed) Bliss Gross earnings to sales Bliss Expenses to sales Bliss Operating profits to sales . Bliss Net profits to sales Bliss Net profits to net worth .... Bliss Earnings left in business to net income Bliss Various classes of assets to total assets (to emphasize manner in which capital is invested) Bliss Various classes of liabilities to total liabilities (to emphasize sources from which capital is drawn) Bliss It will be observed that many of the ratios listed, especially among those advocated by Bliss, do not relate entirely, or in some cases at all, to the balance sheet. It will also be noted that none of the ratios suggested by Gilman and Wall deals with profits, either operating or net, or with expenses. This may be because their articles were intended to consider balance sheet analysis only, though sales figures were introduced to permit the calculation of turnover rates. An income statement should accompany any balance sheet to enable a satisfactory analysis to be made,
Object Description
Title |
Financial statement analysis |
Author |
Stevenson, Spencer Bouldin |
Subject |
Financial statements -- Analysis |
Citation |
Haskins & Sells Bulletin, Vol. 08, no. 11 (1925 November), p. 82-88 |
Date-Issued | 1925 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 8-p82 |